Chilly Partners -- A special report.; Saudi Arabia, Its Purse Thinner, Learns How to Say 'No' to U.S.

By ELAINE SCIOLINO with ERIC SCHMITT,

Published: November 4, 1994

After a late-night banquet of roasted meats and exotic fruit juices at the Saudi Defense Minister's palace in Jidda last month, the talk turned to money.

The Americans asked the Saudis to pay a substantial part of the $500 million bill for the recent American troop buildup in the Persian Gulf and to base dozens of American tanks and planes permanently in the desert kingdom to save time and money in the event of another Iraqi threat.

But Prince Sultan argued that Saudi Arabia was hard up for cash, in part because it was buying billions of dollars of American military equipment. And in a rare breach of Saudi politesse, he suggested that the United States had taken advantage of Saudi Arabia's vulnerability during the last Persian Gulf crisis by overbilling Riyadh for its share of the cost.

Mr. Perry and his team have since concluded that the Saudis will be slow to open up their wallets and that the American proposal to store an armored brigade's worth of equipment is dead. The Pentagon has opened negotiations with the United Arab Emirates to keep the equipment there instead.

"The Saudis have a very nice way of doing things," said Joseph S. Nye Jr., Assistant Secretary of Defense for International Security Affairs and a participant in the meeting. "They say, 'We'll consider it.' It is not their style to say no. But when you listen to the answers you don't hear yes. They gave a very gracious answer that I thought was no and others thought was no."

That attitude reflects the strains in a complicated and sometimes contradictory relationship with an oil-rich kingdom that has been made cash poor by the 1991 war against Iraq, lower oil prices, a decade of budget deficits and arguably the most generous welfare state in the world.

For decades Saudi Arabia has been Washington's most dependable oil supplier and its most important ally in the Gulf -- secretly financing the contra rebels in Nicaragua for the Reagan Administration, playing host to half a million American troops to help the Bush Administration fight the war against President Saddam Hussein of Iraq, and working behind the scenes with the Clinton Administration to move the gulf Arab states closer to Israel.

The relationship, reconstructed in interviews with Administration and Saudi officials, lawmakers and independent experts, is so important that President Clinton regularly chats with King Fahd on the phone and American Cabinet officials line up to visit him.

That trend was capped at a sprawling Saudi military base last Friday by the first face-to-face meeting between Mr. Clinton and the King. The King was gratified that a man young enough to be his son asked for advice on the Middle East peace effort, and told aides afterwards that unlike President Bush, whom he admired but found rather distant, "I can feel the warmth of the personality of this President."

Yet the Saudis wield so much power over Washington that they can snub President Clinton by rejecting his choice of Ambassador and force the Pentagon to scratch plans for ambitious military exercises merely by expressing reservations.

And the clash between the Administration's goals -- preaching fiscal restraint and economic reform while at the same time pitching billions of dollars in sales -- has sent mixed signals to the Saudi kingdom. The Consumer Buy Now, Pay Later

It is hard to overestimate the importance of Saudi Arabia to the United States military.

The kingdom has become the largest single customer for American military contractors, now that the Pentagon isn't buying much. With $30 billion in orders since 1990, it has almost single-handedly kept alive the M1-A2 tank lines of General Dynamics in Ohio and the F-15 fighter plane lines of McDonnell-Douglas in Missouri.

But the Administration got a surprise warning last December when the Saudis approached Washington with a blunt and embarrassing message: Riyadh was so short of cash that it could not meet its payments and asked Washington to help reschedule its debt.

Tortuous negotiations over the next three months at the Saudi Embassy in Washington and at the palaces in Riyadh and Jidda produced only temporary relief: an agreement with five of the largest American military contractors to stretch out $9.2 billion due over five years instead of two.

As part of the arrangement, the Administration came up with a plan to stop American suppliers from selling the Saudis more military equipment. It has refused to approve any new Saudi purchases, and about 15 deals proposed by American companies have been turned down.

With much higher military bills coming due next year, the Pentagon last week dispatched a high-level team to Saudi Arabia to open a new round of lengthy negotiations.

Lieut. Gen. Thomas Rhame, the head of the Defense Security Assistance Agency, the arm of the Pentagon that oversees weapons sales, told Saudi budget planners: commit to a payment schedule or face further delays or possible cancellation of the orders for planes, tanks and Patriot missile batteries rolling off American assembly lines.

"This building has acted very responsibly in seeing itself as the protector of the Saudi alliance over the long term, rather than as an arms merchant in the short term," Mr. Nye said.